3 Calls to Keep Cost and Risk Low

by Ken Trester | October 5, 2012 9:18 am

3 Calls to Keep Cost and Risk Low

Every week, I scan thousands of potential option plays to develop an exclusive list of “Power Options.” Of all the stocks listed in my database, only a relative few give strong buy or sell signals in a given week. Options traders want and need fast-moving stocks, and that’s what I have for you today.

Here are some of my best bets right now:

Recommended Trade: Mips Technologies (MIPS)

Mips Technologies (NASDAQ:MIPS[1]) is a global supplier of semiconductors and memory chips. The stock broke above resistance at about $7 in September, and it should continue moving higher.

I recommend that you buy the Mips Technologies (MIPS) Jan 7.5 Call (MIPS130119C00007500) at a suggested price of $1 ($100 per contract) for a $1.60 target.

Close this position and cut losses if the stock closes below $6.20, when the option price should be about 60 cents. The stock is currently trading at $7.20. The computer-simulated probability of this option hitting its target price is 27%.

Recommended Trade: NetSuite

NetSuite (NYSE:N[2]) provides cloud-based business software and services. The stock has been in a strong, volatile uptrend since May. It recently moved sharply higher, consolidated that gain, and now looks like it is ready to move higher again if stocks continue to rally.

I recommend that you buy the NetSuite (N) Nov 70 Call (N121117C00070000) at a suggested price of $1.30 ($130 per contract).

After taking the position, enter a good-till-cancelled contingent order to sell this option if the stock hits its target price of $69.10.

Close this position and cut losses if the stock closes below $59.10, when the option price should be about 60 cents. The stock is currently trading at $64. The computer-simulated probability of this option hitting its target price is 22%.

Recommended Trade: Gannett

Gannett (NYSE:GCI[3]) is a major newspaper publisher and media company. The stock recently broke out of a long trading range and moved sharply higher. It pulled back slightly, but should continue moving higher.

I recommend that you buy the Gannett (GCI) Nov 19 Call (GCI121117C00019000) at a suggested price of 70 cents ($70 per contract).

After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $20.10.

Close this position and cut losses if the stock closes below $17.20, when the option price should be about 30 cents. The stock is currently trading at $18.33. The computer-simulated probability of this option hitting its target price is 17%.

Bottom Line

At first glance, the probability of profit for these options might seem low. However, 20% is about average for low-cost options such as these. Plus, we calculate the probability that the option will hit its target price; the probability of returning a smaller profit is higher.

Also, our computers calculate probabilities assuming a random market. That means there is a 50% chance that stocks will rise over the next three weeks, and a 50% chance that stocks will fall. The listed number is the average probability. So a call option with a 20% probability theoretically has a 40% probability in a bull market, and a zero percent chance in a bear market. The opposite is true for a put option. It has twice the probability of reaching its target price in a bear market, and a zero percent chance in a bull market.

Of course, options with higher probabilities are available, but those options cost considerably more to buy, and that higher cost raises your risk if the stock does not do as we expect. My overriding concern is to keep risk as low as possible, and paying as little as possible when you buy options is one of the best ways to do that.

Ken Trester[4] is editor of the popular Maximum Options[5] program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.